Indraprastha Medical Corporation Limited (NSE:INDRAMEDCO) Soars 34% But It's A Story Of Risk Vs Reward

Indraprastha Medical Corporation Limited (NSE:INDRAMEDCO) shareholders have had their patience rewarded with a 34% share price jump in the last month. The annual gain comes to 111% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, Indraprastha Medical may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 21.7x, since almost half of all companies in India have P/E ratios greater than 34x and even P/E's higher than 64x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Indraprastha Medical certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Indraprastha Medical

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Indraprastha Medical will help you shine a light on its historical performance.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Indraprastha Medical's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered an exceptional 43% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 227% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Comparing that to the market, which is only predicted to deliver 25% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

With this information, we find it odd that Indraprastha Medical is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.

What We Can Learn From Indraprastha Medical's P/E?

The latest share price surge wasn't enough to lift Indraprastha Medical's P/E close to the market median. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Indraprastha Medical revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

Before you take the next step, you should know about the 2 warning signs for Indraprastha Medical that we have uncovered.

You might be able to find a better investment than Indraprastha Medical. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com